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Have real interest rates really fallen that much in Spain?

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  • Roberto Blanco

    ()
    (Banco de España)

  • Fernando Restoy

    ()
    (Banco de España)

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    Abstract

    This paper analyses the behaviour of real interest rates in the Spanish economy over the last 15 years. Since inflation-indexed-bonds are not available, changes in implicit real interest rates are estimated using several approaches suggested by macroeconomic and financial theory. In particular, we employ equilibrium conditions of a representative agent under several specifications of preferences. Moreover, we exploit no-arbitrage conditions in securities markets. The evidence we report indicates that inflation uncertainty could account for a notable part of the observed decrease in nominal rates. Consequently, the actual real cost of financing might have decreased significantly less than what the course of ex-post real rates would suggest.

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/07/Fic/dt0704e.pdf
    File Function: First version, February 2007
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    Bibliographic Info

    Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0704.

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    Length: 24 pages
    Date of creation: Feb 2007
    Date of revision:
    Handle: RePEc:bde:wpaper:0704

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    Keywords: real interest rates; intertemporal marginal rate of substitution;

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    1. Andrew B. Abel, 1990. "Asset Prices under Habit Formation and Catching up with the Joneses," NBER Working Papers 3279, National Bureau of Economic Research, Inc.
    2. Gali, J., 1992. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice and Asset Prices," Papers 92-22, Columbia - Graduate School of Business.
    3. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
    4. Flood, Robert P. & Rose, Andrew K., 2005. "Estimating the expected marginal rate of substitution: A systematic exploitation of idiosyncratic risk," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 951-969, July.
    5. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of Security Market Data for Models of Dynamic Economies," NBER Technical Working Papers 0089, National Bureau of Economic Research, Inc.
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